Which of the following is true of official reserve transactions?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → They matter more under fixed than under floating exchange rates.
Under a fixed rate the central bank must sell or buy foreign exchange to hold the rate, so official reserve transactions are used often. Under a floating rate the market settles the gap.
Option (1) They are shown in the BoP as errors and omissions. — Incorrect. Errors and omissions is a separate element that covers transactions not recorded accurately.
Option (2) They matter more under fixed than under floating exchange rates. — Correct. The central bank uses reserves to defend a fixed rate.
Option (3) They are autonomous items, shown above the line in the BoP. — Incorrect. They are made to bridge the BoP gap, so they are accommodating items, below the line.
Option (4) They are equal to zero under a managed floating system. — Incorrect. Under managed floating central banks do intervene, so these transactions are not zero.
NCERT (2026-27): “6.1.3 Balance of Payments Surplus and Deficit … The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). We note that official reserve transactions are more relevant under a regime of fixed exchange rates than when exchange rates are floating.” “Autonomous and Accommodating Transactions … Since the official reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).” “6.2.4 Managed Floating … Official reserve transactions are, therefore, not equal to zero.” |